Business Context and Reporting Period
Company: InnSuites Hospitality Trust (REIT)
Reporting Period: Quarter and six months ended July 31, 2010 (Fiscal Year 2011)
Operations: Owns and operates five hotels (843 suites) in Arizona, southern California, and New Mexico. The Trust manages its own properties and provides management/licensing services to affiliated and third-party hotels.
Key Financial Metrics
| Metric | Six Months Ended July 31, 2010 | Three Months Ended July 31, 2010 |
|---|---|---|
| Total Revenue | $8,419,222 | $3,499,517 |
| Operating Income (Loss) | $(176,758) | $(647,303) |
| Net Loss (Controlling Interest) | $(688,208) | $(785,446) |
| Net Loss Per Share (Basic/Diluted) | $(0.08) | $(0.09) |
| Funds From Operations (FFO) | $41,838 | $(421,873) |
| Cash and Cash Equivalents | $413,617 (as of July 31, 2010) | N/A |
| Total Debt (Mortgage + Other Notes) | $22,864,784 | N/A |
| Occupancy Rate (6 Months) | 55.8% | N/A |
| Revenue Per Available Room (REVPAR) | $41.31 | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 11.1% ($1.05 million) for the six months ended July 31, 2010, compared to the prior year. This was driven by a 12.9% drop in hotel operating revenues due to lower occupancy and rate pressure.
- Operating Performance: Operating results shifted from a profit of $400,729 in the prior year six-month period to a loss of $176,758. Occupancy dropped 7.2% to 55.8%, and REVPAR fell 13.0% to $41.31.
- Expense Reduction: Total operating expenses decreased 5.2% to $8.6 million, primarily due to lower occupancy reducing variable costs. Sales and marketing expenses dropped 18.3%.
- Interest Expense: Total interest expense increased 4.4% to $792,000 for the six-month period, attributed to higher loan balances from refinancing the Albuquerque and Yuma properties.
- Cash Flow: Net cash used in operating activities was $293,792, a reversal from the $590,098 provided by operations in the prior year period.
Outlook, Risks, and Management Commentary
- Liquidity Concerns: Management projects that cash flows from operations alone may be insufficient to meet financial obligations in the last two quarters of fiscal year 2011. A significant debt maturity of approximately $7.5 million is due in May 2011 on the Ontario, California property.
- Financing Actions: To address liquidity, the Trust secured a new $1.0 million line of credit on August 1, 2010, from Rare Earth Financial, LLC (an affiliate of the CEO). Management is also negotiating a replacement for a bank line of credit that expired on June 30, 2010.
- Asset Restructuring: The Partnership sold a 12% interest in the Albuquerque property to Rare Earth Financial for $400,000. An agreement was executed to sell at least 51% of the membership interests in the Albuquerque entity to Rare Earth or other investors.
- Market Risks: Operations are negatively impacted by the global economic downturn, reduced travel demand, and increased supply in specific markets (notably Yuma, Arizona). Seasonality also affects quarterly results.
Investor Verification Checklist
- Debt Refinancing: Verify the status of refinancing or extension for the $7.5 million Ontario property mortgage maturing in May 2011.
- Liquidity Sufficiency: Confirm if the new $1.0 million affiliate line of credit and operating cash flows are sufficient to cover obligations through the end of fiscal year 2011.
- Albuquerque Sale: Monitor the progress of the sale of the remaining 51%+ interest in the Albuquerque property to Rare Earth Financial.
- Bank Credit Line: Track the negotiation status of the replacement bank line of credit to ensure no gap in working capital facilities.
- Occupancy Trends: Assess if occupancy rates and REVPAR stabilize or continue to decline in the face of economic conditions and local supply increases.